GERMAN BANKING RETURNS TO THE PLAYING FIELD - PERSPECTIVE JULY 2021 - MCKINSEY
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Perspective German banking returns to the playing field July 2021
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The next game is always the hardest.
—Sepp Herberger, coach of the 1954 world champion German soccer team
Contents
Introduction: Preseason analysis 4
1. German banking today: Heading toward relegation? 7
Banks are reliable on the fundamentals 7
High stability 7
Meeting financial needs 7
Relatively low prices 7
A tough business environment demands more of banks 9
Overbanked and fragmented market 10
Declining revenue pool 10
Falling market share 10
Low efficiency 11
Low profitability 12
A tarnished public image? 13
Declining economic contribution 13
Decreasing market capitalization 13
Declining appeal for new talent 14
2. Time for a new campaign 17
Recognize the profit challenge and raise ambitions 17
Breaking the 0 percent ROE trend 17
Raising ambitions lead to sustainable business growth 17
Choose a revenue and cost pathway toward 7–8 percent ROE 19
Prepare for additional challenges and set holistic priorities 22
Customer at the center—always and everywhere 22
The ESG challenge 24
Set top priorities 26
2 German banking returns to the playing field
3. A winning game plan for 2030 29
Craft a more responsive business strategy 30
Enhance tech-enabled customer engagement 31
Breathe customer centricity 31
Unlock data and analytics 32
Live smart-channel distribution 33
Engage in new-business building 35
Embrace innovation and digital business building 35
Agree on a new deal with customers 36
Follow clients abroad 36
Build a truly digital operating model 37
Digitize for productivity 37
Consolidate and cooperate to build scale 38
Optimize for capital usage 39
Restructure and refurbish culture 39
Include ESG in banking’s purpose 40
The next season 45
Notes 46
Authors and contacts 51
German banking returns to the playing field 3
Introduction:
Preseason analysis
If trends continue and German banks take no
action, ROEs could fall to 0 percent by 2030.
For generations, Germany‘s banking industry has will become less and less relevant to the German
played a central role in the country‘s economy. Banks economy and society, and might follow a similar
provide loans to support businesses, help families downward path as slow-moving incumbents in other
buy cars and homes, offer secure and nearly instant industries.
payments, provide products for investors, and are
The vast majority of executives we interact with
often considered to be highly prestigious employers
accept the difficulties banks are facing, and
in Germany.
most believe that banking needs a fundamental
Yet, the industry’s reputation is mixed at best. transformation. However, this transformation may
As fast-moving, well-funded competitors have not be destined to materialize. Opinions differ
emerged, banks are increasingly viewed as reserve- widely on whether it will happen or succeed.
team players who no longer retain a key role in the
Based on this perspective, we propose a game
German financial sector. Yes, banks helped stabilize
plan to build a better-performing and healthier
and reengage the economy during the COVID-19
industry. We share five main messages:
pandemic, but their public reputation has declined,
and the banking sector seems less relevant in the 1. Banks remain at the heart of Germany’s economy,
overall game plan for the German economy. providing vital financial services, managing risk,
and helping to pull the economy through the
Many banking leaders trust in the resilience of
pandemic.
the banking system and believe banks can raise
their game to meet new expectations in today’s 2. However, the outlook for incumbent banks is not
competitive marketplace. They point to sectors good. Without any action by banks, they would
such as energy and telecommunications, which face continued market share losses and falling
have balanced resilience and renewal to overcome profits, and ROE would be on course for 0 percent
significant challenges. Others believe that the sector by 2030. Alternatively, if banks continue to pursue
is facing serious disruptions and that German banks
4 German banking returns to the playing field
and amplify current initiatives in the areas of Throughout the report, we provide insights garnered
digitization and customer centricity, they could from successful transformations of the banking
achieve a more acceptable 3 to 4 percent ROE by sector in Sweden, China, and Japan, as well as
2030. from other industries, including energy, media, and
telecommunications. Our aim is to foster a clear-eyed,
3. Even if they achieve the 3 to 4 percent ROE mark,
constructive, and perhaps uncomfortable debate on
Germany’s banks will still face a shortfall of €30
the future of banks and the entire banking sector in
billion to €40 billion in operating profit, rendering
Germany across retail and private banking, corporate,
them incapable of making required investments in
and investment banking, asset management, and
digitization and addressing environmental, social,
payments. We base our analyses and recommendations
and governance (ESG) concerns.
on exclusive primary research from McKinsey &
4. German banks can learn from other businesses— Company and several dozen touchpoints with industry
both in banking and beyond—that have leaders and representatives of the German banking
successfully transformed, even in regulated yet sector and beyond.
rapidly changing industries.
We are optimistic that German banking can have a bright
5. Five improvement themes can boost operating future. Through hard-work, courage, and ambition,
profits: (1) more responsive business strategies; banks can regain their national and international
(2) tech-enabled customer engagement; (3) new relevance and the prestige they once enjoyed.
(digital) business building; (4) truly digital operating
We hope this report provides a valuable perspective
models; and (5) a redefinition of banking’s purpose
for German banking leaders as they consider the path
to incorporate ESG principles.
forward for the industry.
We begin with a fact-based analysis of the situation and
long-term trends in German banking and then discuss
possible aspirations for banks and their stakeholders,
including consumers, corporations, and employees. We
conclude by identifying the most important changes
that will lead to a healthier and better-performing
German banking sector.
2/3 of German banking executives¹ think radical
changes are required in the industry
German banking returns to the playing field 56 German banking returns to the playing field
1. German banking today:
Heading toward relegation?
We have just decided not to disband the club even though we drew.
Jürgen Klopp, football player, coach, and Champions League Winner 2019
Banking services provide financial depth to any book is well below the European average of 2.1
economy and are critical to growth. Such services percent. The average rating of German banks in
include financing solutions, transaction services, 2021 is A+, with 75 percent better than A–, while
cash handling, and investment opportunities for the average rating of European banks is A, with 25
individuals and corporates. Germany ranks in the percent having a BBB rating or lower.⁶
top quintile globally with regard to financial depth,²
Meeting financial needs
which is strongly associated with overall economic
Wholesale lending in Germany totals about €2.4
growth.³
trillion each year, including about €600 billion to
In total, about €10 trillion flow through the German small and medium-size enterprises (SMEs), up more
financial intermediation system every year. Relative than 30 percent since 2010, as well as some €650
to other players in the German financial system, billion to large corporates, up more than 40 percent
the country’s banks command a larger share since 2010. Retail mortgage lending has grown
of financing: about 65 percent of assets are on by about 30 percent since 2010 and now tops €1.1
banking balance sheets,⁴ compared with less than trillion.⁷ Germans rely on banks: 99 percent of adults
50 percent globally;⁵ by contrast, capital markets have an account⁸ and live within five kilometers
are weaker. of an ATM,⁹ and more than 50 percent of German
individuals invest for retirement.10 The industry
Banks are reliable on the fundamentals offers a broad range of products and services to
ensure intermediation between sources and uses of
The German banking industry has reasons to feel a
funds (Exhibit 1).
certain level of satisfaction: it is stable and delivers
on its core functions, including managing risk and Relatively low prices
meeting vital financial needs at competitive prices. German banks provide standard products at
relatively low cost by international standards. This
High stability
is especially true for daily banking products in
German banks exercise prudent risk management.
retail and corporate banking, while the costs for
Nearly all institutions have expanded their risk and
corporates are about average in Europe before and
compliance capabilities since the financial crisis.
after risk costs. Fees for day-to-day banking, such
Consequently, the sector’s capitalization, at a
as current accounts, including overdrafts, all types
Common Equity Tier 1 (CET1) ratio of 15.6 percent,
of payments, and online banking, are lower than
is slightly higher than the European average of
in other large European countries for individuals,
15.4 percent, while the risk provisioning (loan loss
measured as absolute costs, and for corporates,
reserves) of 0.9 percent of the total customer loan
German banking returns to the playing field 7Exhibit 1
The complex German financial intermediation system generates annual revenues of more than
The complex
€150 billion. German financial intermediation system generates annual
revenues of more than €150 billion.
Off banking balance sheet
On banking balance sheet
Sources of funds,¹ € billion Banking revenues, 2019, € billion (share of total) Uses of funds,¹ € billion
10,100 10,100
Other institu- Asset management Market infrastructure Other
tional AUM2 775 825
investments3
Insurance AUM 775 13 (9%) 5 (3%) 775 Equity funds
Pension
funds AUM 775 Wealth management and Investment banking Fixed-income
investments 1,500 funds
Retail AUM 1,225 12 (8%) 7 (4%)
450 Multiasset funds
Corporate Corporate and commercial banking
and public 1,400 Corporate and Corporate and
deposits Corporate and
public deposits 4 (2%) public lending 39 (26%) 2,475 public loans
Retail banking Treasury Mortgage 14 (9%)
Personal
deposits 2,375
Retail Consumer
deposits 18 (12%) finance4 24 (16%) 1,800 Retail loans
Payments
Banks’ bonds,
other liabilities, Business-to-consumer 9 (6%) Business-to-business 8 (5%) Securities held
2,775 2,000 on balance
and equity
Total annual revenue of financial intermediation is sheets
more than €150 billion 275 Other assets
1
Off-balance-sheet items exclude directly held securities from retail investors, counterpart at use of funds also excluded to be consistent; revenues not affected
as revenues from securities reflected within CMIB.
²Institutional assets under management (AUM) include endowments and foundations, corporate investments, etc.
3 Includes real estate funds, commodity funds, hedge funds, etc.
4 Includes revenues from professional loans.
Source: Deutsche Bundesbank; McKinsey Panorama—Global Banking Pools; McKinsey Performance Lens; McKinsey analysis
8 German banking returns to the playing fieldmeasured as share of total adjusted corporate A tough business environment
turnover (Exhibit 2). Overall revenue in the German demands more of banks
financial intermediation system is about 150 basis
As we have described, German banks have some
points (Exhibit 1) compared with the global average
reasons for satisfaction in their performance—
of about 180 basis points,11 confirming the highly
stability, risk management, competitive prices,
competitive nature of the German banking market.
among them. However, some of the factors that
German banks overall approve more corporations
have driven the success of banks in recent years are
for loans than banks in other European countries—
losing their strength, and fundamental upheavals
as of 2019, only 5.7 percent of SMEs report access
in areas such as technology and demographics,
to finance as their most important issue, compared
and emissions and sustainability targets related
to 8.5 percent in Spain, 7.6 percent in France, and
to ESG, require a transformation of the German
10.4 percent in Italy.12
banking industry—in fact, from all segments of the
These metrics imply that the industry is in relatively German economy—by 2030.14 Banking leaders in
good shape. Indeed, it is partially due to digitization Germany can take comfort and inspiration from
that the industry has weathered the impact of transformations by incumbents in other industries,
COVID-19 reasonably well. More than 40 percent including energy, media, and telecommunications,
of German customers interact regularly with their and from banks in Sweden, China, and Japan. (See
bank digitally, and 79 percent report being at least sidebars throughout the document.)
satisfied with their bank’s digital channels.13
Exhibit 2
Daily banking costs in Germany are low by European standards.
Daily banking costs in Germany are low by European standards.
Cost of daily banking1 Cost of corporate loans2
Absolute cost per Cost per corporate Before risk cost After risk cost
individual, € share of turnover, % %
basis points
Germany 130 12 1.9 1.8
France 160 14 1.7 1.6
Italy 270 20 2.1 1.3
Spain 410 18 1.8 0.7
UK 290 24 3.3 3.0
1
Includes maintenance fees, interest revenues, incident fees, transactional fees (except cards) for cash, checks, transfers, direct debit, current account,
cross-border business, remittances, overdraft, and cards.
2Includes pure customer interest rate before refinancing costs.
Source: Eurostat; McKinsey Panorama—Global Banking Pools; McKinsey analysis
German banking returns to the playing field 9The resilience of Swedish banking
Despite a severe banking crisis in the 1990s and a highly digital consumer and corporate landscape, Swedish banks are a profound
example of banking resilience. To emerge stronger from that crisis, they pursued two critical changes:
1. A digital-first approach to every customer interaction, product, and process. By 2020, about 85 percent of individuals
were using digital channels for banking activities and services.15 The required investments quickly paid for themselves, as they
helped banks control costs: for example, the number of branches per capita in Sweden in 2020 was 58 percent lower than in
Germany.16 Swedish banks now deliver ROE of about 15 percent—one of the highest rates in any market in the world,17 driven
in part by a favorable macroeconomic environment—while maintaining a strong capital base. To sustain that profitability,
the next wave of digitization includes the AI-supported automation of mid- and back-office processes and protecting the
customer franchise against digital attackers.
2. A rigorous consolidation process. Four leading banks emerged from the crisis. All expanded their customer offerings after
their mergers and entered a sustained growth mode. Swedbank, for example, has developed into a full commercial bank. With
a combined market share of 65 to 70 percent,18 as well as clear product and pricing strategies, the top four incumbents earn
healthy margins even in a low-interest-rate environment.
Of course, this represents a simplified view and does not reflect the complexity of the Swedish banking market: for example, banks
also invested in more bespoke advisory services, for instance in wholesale and private banking.
Takeaways: Harnessing the potential of digitization and achieving economies of scale through cooperation and consolidation
can significantly improve resilience.
With a successful transformation, German banks Declining revenue pool
can meet the challenges they face—including Historically, the revenue pool in the German banking
overbanking and fragmentation, declining revenue market has grown steadily in line with GDP. Between
pools, falling market share, low efficiency, and low 2010 and 2019, however, it fell by about 8 percent
profitability—and turn them into opportunities. from €129 billion to €119 billion.21 That decline is
dramatic, considering that the overall economy
Overbanked and fragmented market
grew by 35 percent in absolute terms over the same
While the number of banking branches has steadily
period.22 Most of this decline can be attributed to
declined by about 4.5 percent annually since
persistently low interest rates that could be only
2010, more than 24,000 branches are still open,
partly compensated for by higher fees—while German
along with about 68,000 ATMs. This density of 2.9
banks’ charges for daily banking and credit products
branches and 8.2 ATMs per 10,000 inhabitants is
are attractive to consumers, low prices lead to
higher than in most other European markets. The
substantial challenges on the revenue side.
United Kingdom, for example, has a density of 1.3
branches and 9.1 ATMs per 10,000, and Sweden Falling market share
has 1.2 branches and 2.6 ATMs.19 COVID-19 will German banks have lost sizable market share
likely accelerate this trend as people use less cash, in terms of revenues to foreign banks, including
ATMs, and branches in the future. European and US players, specialized players
that operate without banking licenses, and digital
The industry remains fragmented. The top five
attackers, including tech companies. The revenue
banks in Germany have a 31 percent total asset
share of German domestic incumbent banks fell
market share, considering savings and cooperative
from about 70 percent in 2010 to 60 percent in
banks as individual institutions. In comparison, the
2019. They still dominate retail banking (including
European average is 50 percent.20
10 German banking returns to the playing fieldprivate banking) with an 80 percent share but have few expect German banks to play only minor roles
retained only a minority of the market in investment in investment banking and parts of payments, and
banking and wealth and asset management, they anticipate similar trends in corporate banking,
with shares of about 20 percent and 45 percent, asset management, and other payment areas. (For
respectively (Exhibit 3). an example of banks addressing similar challenges
elsewhere, see the sidebar “The relegation of Chinese
German banking executives tell us that they
incumbent banks—and their comeback?”)
expect direct/online banks and digital attackers,
including tech companies and specialist players, Low efficiency
to fundamentally drive the competitive landscape Despite its focus on costs, the German industry has not
in the years ahead. Most are upbeat about their been able to translate these efforts into a significantly
own institutions’ prospects but also expect market better cost position. From 2010 to 2019, operating
shares to keep shifting across the board. Quite a costs rose about 10 percent, from €82 billion to
“Cost” was mentioned twice as often in 2020 bank annual
reports as in 2010 reports, while mentions of
‘revenue’ and ‘growth’ stayed level23
Exhibit 3
Revenues
Revenues shifted
shifted sharply
sharply in thein the
last last decade,
decade, especiallyespecially
for domesticfor domestic banks.
banks.
Market share, 2010 and 2019, %
Domestic Foreign Specialist Digital
banks1 banks2 players3 attackers4
Rough estimates
Asset and wealth Corporate Investment
Retail banking⁵ Payments management banking banking
2010 85 65 55 70 35
2019 80 55 45 55 20
Change, 2010–19,
domestic banks,
percentage points −5 −10 −10 −15 −15
1
Incumbent banks and their subsidiaries operating and headquartered in Germany.
2Banks operating in Germany that are majority owned by financial institutions with headquarters abroad.
3Companies operating without a banking license, especially those with focus on payments, asset management, and capital markets infrastructure.
4Recently launched companies operating with a digital value proposition, including tech firms, neobanks, and neobrokers.
⁵Includes private banking.
Source: BVI—Bundesverband Investment und Asset Management; Dealogic; Deutsche Bundesbank; McKinsey Panorama—Global Banking Pools; McKinsey
Performance Lens; McKinsey analysis
German banking returns to the playing field 11Over the last ten years, German banks have
lost five to 15 percentage points market share to
specialist players, digital attackers, and foreign
banks across all sectors.
€90 billion,24 about 50 percent faster than those of Italy and Spain, for example, have reduced costs by 1
European banks overall.25 While the sector has almost percent and 7 percent, respectively, since 2010.27
compensated for inflation-driven wage increases
Low profitability
by decreasing head count (employees per 10,000
inhabitants declined from 82 in 2010 to 67 today), non- With a declining revenue pool and rising costs,
staff costs rose by 17 percent, compared with only 3 the operating-profit pool has shrunk from €31.2
percent for staff costs.26 billion to €21.8 billion, down 30 percent since 2010.
German banks’ five-year average after-tax return
Unsurprisingly, this falls behind European benchmarks,
on average equity (ROAE) is only 2.9 percent today,
despite a roughly similar regulatory environment. In the
lower than the average of France, Italy, Spain, and
context of a genuine transformation mindset, banks in
The relegation of Chinese incumbent banks—and their comeback?
In China, digital-ecosystem players such as Alibaba, Pinduoduo, Ping An, and Tencent have built comprehensive platforms that offer
consumers digital and e-commerce services and a wide range of financial services, from payments and financing to wealth management.
As they collect vast quantities of data, these players gain valuable insights into customers and markets and find opportunities to expand
and innovate. When these digital players first emerged, incumbents made few efforts to cooperate—and mostly ended up as mere
balance-sheet providers.
Since 2018, many banks in China have worked hard to integrate themselves better into these digital ecosystems, instead of building
their own. Examples include the partnership between ICBC and Alibaba and China Construction Bank’s establishment of its own fintech.
Many banks have also supported government efforts around the DCEP (the local central-bank digital currency), which would tokenize all
payments and require banks to act as payment and wallet intermediaries. This in turn could provide partial access to existing closed-loop
wallets, such as those provided by Alibaba and Tencent.
Takeaways: German banks should look for meaningful ways to collaborate and cooperate with the new digital and ecosystem
players, which are here to stay; fighting them is likely a losing proposition in the long term.
12 German banking returns to the playing fieldthe United Kingdom, which is about 3.7 percent expect the contribution of the sector to fall even
(Exhibit 4). In Sweden, it tops 15 percent. further in the years ahead.
Decreasing market capitalization
A tarnished public image? In 2005, German banks made up 11.2 percent of
After a low point during the financial crisis, banking’s the DAX family market cap, but their share has
public image has recovered somewhat, but the sector dropped, landing at 1.4 percent in 2020 (Exhibit
overall has nevertheless lost relevance in Germany. 5). German banks over the same period delivered
annual total shareholder returns of −10.0 percent,
Declining economic contribution
compared with +7.3 percent for the entire DAX
Financial and banking services’ share of total gross
family. While listed German banks stabilized after
value added has fallen further in Germany than in
the financial crisis, their decline accelerated after
many other countries: from 3.8 percent in 2005 to
2015, with annual losses for investors of more than
2.3 percent in 2018.28 This downward trend is not
15 percent.29
expected to end soon. In fact, about 50 percent of
leading banking executives in Germany say they
Exhibit 4
Germanbanks
German bankshadhad a high
a high cost-to-income
cost-to-income ratio
ratio in the last in the last decade.
decade.
Cost-to-income ratio, % After-tax return on average equity,
average for 2015–19, %
2010 2015 2019 Germany1 2.92
Europe top 43 3.7
Japan 4.2
76 US 9.9
70 Sweden 15.2
China 12.2
64 64
61 61
60 60
59 59 58
52
47
41
38
35
1
ROE calculated based on profit after tax and before transfers to the fund for general banking risks as a percentage of the average equity (includes the fund for
general banking risks, but excludes participation rights capital).
2Includes negative ROE in 2019, much of which arose from high value adjustments at a large German bank.
3France, Italy, Spain, and the United Kingdom.
Source: Deutsche Bundesbank; McKinsey World Banking Intelligence
German banking returns to the playing field 13The trends and developments we have outlined
Declining appeal for new talent
here are more than just bumps and bruises, but
Financial institutions are becoming less attractive
we believe that the banking sector can return to
to employees and potential recruits, especially
the field of play with renewed energy, perhaps
graduates and young professionals. In 2010, three
emulating the example of resilience set by the
German banks were among the 50 most attractive
energy industry (see sidebar “How leaders in the
employers for business students. By 2021, only one
German energy sector adapted to new rules”).
German bank remained on the list, and its ranking
Banks will need to adopt new mindsets and
among the top 50 had declined sharply.30
ambitions, tackle long-term challenges, accelerate
In 2007, 38 percent of German citizens said banking digital innovation, and make radical transformative
jobs had a very high reputation, but only 23 percent moves toward larger and more sustainable profits,
shared that view in 2020.31 This is a significant relevance, and prestige. This will require a new
decrease from an already-low level compared with level of cooperation among stakeholders but could
other professions. ultimately help banks regain their position within
the German economy and society.
Exhibit 5
German banks’ share of the DAX family market cap has fallen from 11 percent to 1 percent in the
German banks’ share of the DAX family market cap has fallen from 11 percent
last 15 years.
to 1 percent in the last 15 years.
Market capitalization of German banks in DAX family1 (DAX, MDAX, SDAX, TecDAX), 2005–20 (year-end)
€ billion
xx DAX family 2,030
xx German banks
(xx%) German banks’ share of DAX family
1,577
997
937
105 47 57 29
(11.2%) (4.7%) (3.6%) (1.4%)
2005 2010 2015 2020
Number of
German banks 13 7 8 5
in DAX family2
1
Includes the top 160 companies by market capitalization.
2Includes financial service companies with a banking license and a main focus on banking and banking-related services. Pure financial sales companies, broker-
age platforms, asset and investment managers, and stock exchanges are excluded.
Source: Bloomberg; McKinsey analysis
14 German banking returns to the playing fieldHow leaders in the German energy sector adapted to new rules
Following economic liberalization 20 years ago, the Energiewende (energy transition toward renewables) ten years ago, and
increasing climate pressure today, many people thought the energy sector was ripe for relegation. Indeed, these changes
triggered major shifts in technology, greater consolidation, and the rise of digital attackers.
For many reasons, investments in new and old technology were required. While renewable-energy generation tends to be
decentralized, energy companies needed to make significant investments in offshore renewables, networks, and some traditional
power plants. The industry reacted with consolidation, funding infrastructure through pension funds and other nontraditional
sources, recalibrating their value chains, and spinning off some traditional infrastructure. Overall, the industry rose to the
challenge: the top five German energy firms have made €377 billion in capital investments since 2010.32 These investments are
now seen more as part of the solution than part of the problem.
Following liberalization, incumbents were also confronted by attackers with new business models, which targeted the customer
interface and offered prices low enough to motivate many customers to switch. Many incumbents are responding with “second
brand” strategies to compete in this “switcher segment,” focusing on certain target groups and price segments and ultimately
assimilating attackers. The more than 900 regional Stadtwerke (municipal power providers) still in business in Germany33 used
their local marketing and identities, and their ties with municipalities, to defend their strong footholds.
Takeaways: Banks can accelerate digitization by increasing investment capacity with cooperation, consolidation, and new funding.
They can also protect revenue pools against digital attackers by adopting more agile business models, launching secondary brands,
engaging in digital marketing, and partnering with fintechs.
German banking returns to the playing field 1516 German banking returns to the playing field
2. Time for a new campaign
The toughest opponent is usually oneself.
Joachim Löw, coach of the 2014 world champion German soccer team
In the first chapter, we laid out the challenges we see largely focus on digitization and customer centricity.
for Germany’s banks. While these challenges are These mitigating initiatives may lead to a more
significant, we also believe that there is a pathway to likely scenario: by accelerating existing efforts and
a more sustainable future for the industry. However, continuing focus on their core business, the sector
the journey will not be easy, and will require a new could maintain its current after-tax ROE of 3 to 4
approach with three broad imperatives: (1) raising percent or operating profit before risk of 35 to 40
the profit ambition; (2) setting a revenue and cost basis points of average assets.35
pathway toward an ROE of 7 to 8 percent; and (3)
However, that level of improvement still would not
preparing for future challenges and establishing top
lead to long-term sustainable growth for the industry,
priorities.
and it could lead to further downsizing, especially
in corporate banking, asset management, and
Recognize the profit challenge and payments. This would imply a stronger concentration
raise ambitions on retail and SME business, where banks would
If German banking continues on its current still have to tackle significant challenges such as
course—assuming slightly declining revenues, a digitization, finding funds to adapt to constantly
rising cost base, and risk costs below their long- changing customer needs, and developing a
term average—return on equity would fall to 0 sustainable strategy that addresses ESG issues.
percent.34
Raising ambitions lead to sustainable
Breaking the 0 percent ROE trend business growth
Most banking executives recognize the need Banks need profits to meet their challenges and
for change: two-thirds say radical changes are keep pace with the competition. Exactly how
required, and only a third claim that continuous profitable each bank needs to be depends on many
transformation is sufficient. Current initiatives factors, including what investors, shareholders,
0% ROE 2030 forecast for German banks on
current trajectory
German banking returns to the playing field 173–4% ROE 2030 forecast in mitigation scenario
and stakeholders expect; what is required to appropriate, based on a long-term inflation
support the German economy with its high export target of 2 percent as a risk-free rate, an equity
orientation; and what is required to stay relevant in beta of 1.0 to 1.2, and a market risk premium of 5
the European and international space. In the end, percent.36
the sector must earn sufficient profits to satisfy the
— Analyst estimates. Listed banks can use a cost-
return and dividend expectations of shareholders
of-equity estimate from sell-side analysts. While
and owners and build a capital base large enough
only a few German banks are listed, this method
to provide stability and room for growth, including
points to a cost of equity of 10 to 12 percent.
resources to invest in transformation and long-term
innovation. — Top German players. Several German banks
have consistently delivered double-digit
The most common profitability metric, at least for
after-tax ROE in recent years, many of them
traditional banks, is after-tax return on average
in specialized businesses such as pure online
equity, which can be compared to the cost of equity
banking, consumer finance, or wholesale
for investors. The average after-tax ROE of German
lending, or in asset-light businesses such as
banks between 2015 and 2019 was just 2.9
private banking or advisory-focused corporate
percent—too little to meet investor expectations
finance services.
or provide enough funds for dividends, capital
accumulation, or required investments. Setting — Other banking markets. Comparison groups
the appropriate ROE or cost-of-equity targets could be other large European banking
from a shareholder or owner perspective is markets, Japan, Sweden, and the United
not straightforward, however, especially for States (see sidebar “Setting new financial
incumbents in demanding regulatory environments aspirations in the Japanese banking market”).
and difficult market conditions. Four methods can In these markets, we find that average after-
provide at least rough indications of ambitious but tax ROEs between 2015 and 2019 range from
realistic profit targets: 3.7 percent to 15.2 percent.
— Capital asset pricing model (CAPM). A As capital requirements rose after the financial
cost of capital of about 7 to 8 percent seems crisis, some banks began using a hypothetical
An industry-wide 7–8% after-tax ROE is
ambitious but achievable—and is required
to fund innovation and investments.
18 German banking returns to the playing fieldcapital metric based on about 12.5 to 14 percent of use growing profits also to support stronger regional
risk-weighted assets instead of real equity capital to relationships, local development, and marketing and
reflect this factor. sponsorship at a grassroot level. This ROE goal is
ambitious but achievable, given the returns of banks
Considering all this, a realistic target for German
in other markets and those of some of the top German
banks would be at least 7 to 8 percent after-tax
players.
ROE (Exhibit 6). This would translate into healthy
profitability levels of operating profit before risk of
70 to 80 basis points of average assets or after-tax
Choose a revenue and cost pathway
profits of €40 billion to €45 billion, which ultimately
toward 7 to 8 percent ROE
would attract new investors, transmit a positive signal To deliver 7 to 8 percent after-tax return on equity
to top talent, and help the banking sector maintain by 2030, banks will need to raise revenues and
its relevance. Savings and cooperative banks can significantly improve their cost structures (Exhibit 7).
The ROE target translates into 70–80 bps
operating income of average assets.
An ROE
Exhibit 6 target of 7 to 8 percent seems appropriate, considering different
estimation
An ROE targetmethods.
of 7 to 8 percent seems appropriate, considering different estimation methods.
Derived after-tax return on average equity targets for German banks, %
Determining cost of equity (COE) Comparing with ROE levels of leading German players and other
for German banks banking markets, average, 2015–19
CAPM1 Analyst estimates Successful German players2 Other banking markets
15.2
13.9
~10–12 Target range of
7–8% ROE 10.0 9.9
~7–8
3.7 4.2
German Listed Online Specialized Europe Japan US Sweden
banking German banks players top 4
market banks
1
Capital asset pricing model, assuming risk-free rate of 2%, equity beta of 1.0–1.2, and market risk premium of 5%.
2Online banks include DKB and ING; specialized players include Aareal Bank, Deutsche Pfandbriefbank, HSBC Trinkaus & Burkhardt, Mercedes-Benz Bank,
Santander Consumer Bank, Targobank, and Volkswagen Bank.
Source: Analyst reports; annual reports; McKinsey World Banking Intelligence; McKinsey analysis
German banking returns to the playing field 19Setting new financial aspirations in the Japanese banking market
The Japanese banking market has now endured almost two decades of near-zero interest rates and very slow GPD growth. This
resulted has in specific developments over two phases.
In the first phase of the crisis, banks took various actions to stabilize themselves, given continuously decreasing net interest margins
and nonperforming loans. In addition to obvious measures such as restructuring balance sheets, cutting costs, expanding fee
business, and building up capital, two developments stood out:
1. Consolidation. Over two decades, 16 banks merged into three megabanks which earn about 52 percent of the nation’s total
banking revenues and 47 percent of ordinary profits in 2019.37 More than 100 regional banks remain, however; most of them
purely commercial. With their low profitability, these are facing increasing pressure to consolidate.
2. International expansion. Searching for new revenue sources, Japanese banks started to look abroad, initially in investment
banking and international lending. Failing to establish strong footholds in attractive fee businesses, they pivoted toward
offerings in Japanese and Asian trade and financial flows.
In the second phase, starting around 2014, banks began to focus more on profitability. The three megabanks started to set more
ambitious ROE targets to satisfy the needs of investors. Encouraged by the ambitious targets and pulling levers such as capital
optimization and new attempts to increase fee business, the megabanks delivered an average ROE of 6.6 percent between 2015
and 2019,38 far higher than the 4.2 percent generated by the Japanese sector as a whole.39
Some takeaways: Ambitious financial targets based on clear strategies can create momentum and are prerequisites for the
sector’s long-term health.
On average, a bank would need to deliver revenue change required, including ambitious improvements
increases of at least 2 percent annually. This is a on the revenue and cost sides. Nonetheless, about
significant turnaround, given that revenues have half of German banking executives we spoke with
declined by about 0.9 percent annually since 2010. said they expected the CIR of the entire sector to be
At the same time, costs would need to decrease by 1 between 60 and 70 percent in 2030; only about one
to 2 percent per year, which is ambitious considering in four expected it to be below 60 percent.
average cost increases of 1 percent each year since
These directional changes on the revenue and cost
2010.
sides are more ambitious than the small annual
These improvements would imply a reduction in the improvement numbers indicate, however. Banks
cost-to-income ratio (CIR) from 76 percent in 2019 have already reaped the low-hanging fruit, such as
to 55 percent in 2030, illustrating the magnitude of tactical price increases and squeezing suppliers, so
20 German banking returns to the playing fieldExhibit 7
ROE
ROEvaries
variessignificantly depending
significantly on revenue
depending and costand
on revenue paths until
cost 2030.until 2030.
paths
After-tax ROE forecast, 20301,2
% Target level
Acceptable level
Average CAGR, 2010–19 Mitigation needed
+3 5.0 6.3 7.5 8.5 9.5 10.3
+2 3.4 4.8 6.0 7.1 8.1 9.0 After-tax ROE of >7.0%
matches or exceeds COE3
Assumed
revenue +1 1.7 3.2 4.5 5.6 6.7 7.7
evolution
until 2030 0 After-tax ROE of 4.5–7.0% is
0.1 1.6 3.0 4.2 5.3 6.3
% per year close to COE3
–1 –2.3 0.0 1.5 2.8 4.0 5.0 Average CAGR, 2010–19
–2 –4.7 –2.3 –0.1 1.3 2.6 3.7 After-tax ROE ofExhibit 8
To avoid staff reductions above historic trend, revenue improvement and
To avoid staff reductions above historic trend, revenue improvement and control of nonstaff cost
control of nonstaff cost is required.
is required.
Number of banking employees, thousands
−1% per year Scenario to reach after-tax ROE of 7–8%:
–3% per year Improved revenue growth and control of nonstaff costs and wage growth
673
626
561 –3% per year
~385
Historic
development
2005 2015 2019 2030 Scenario assumtions1 2010–19
+2.3% Annual change in revenues −0.9%
0.0% Annual change in nonstaff costs +1.8%
+1.5% Annual wage growth +2.1%
Overarching assumptions: (a) risk costs, based on average from 2015 to 2019, grow with 50% of the underlying revenue growth until 2030; (b) average equity
1
grows with 50% of the underlying revenue growth rate until 2030; (c) there are no extraordinary losses and one-off effects for 2030; and (d) tax rate stays
constant at 31% (average between 2015 and 2018, 2019 rate not representative due to extraordinary losses).
Source: Deutsche Bundesbank; McKinsey analysis
the fact that the percentage of employees over 50 Customer at the center—always and
years old has increased from 16 to 40 percent since everywhere
2004. At the same time, however, they should ensure Banking leaders can begin with the most basic
that sufficient new talent (especially data and digital questions, such as whether they’re meeting every
specialists) is either hired in or developed internally.40 customer’s needs today. For each banking segment,
options exist for fundamental improvements in
products, services, and customer experience
Prepare for additional challenges and
(Exhibit 9).
set holistic priorities
Across industries, true customer centricity offers
On the demand side, banks should consider not only
powerful competitive advantages (see sidebar
how customers’ needs are changing, but also how
“Innovating under pressure: The media industry”).
addressing ESG factors can improve organizations’
It is a tall order for banks, but they can learn from
standing in their communities. Both perspectives
studying the experiences of financial institutions
can offer insights into which aspirations to prioritize.
22 German banking returns to the playing fieldTo achieve sustainable profit levels, German banks must
not only accelerate their efforts to improve performance
but also deliver an additional 3–4 percent annually in
combined revenue and cost improvement, likely with
slightly higher contributions from the revenue side.
Exhibit 9
Eachcustomer
Each customer group
group seeksseeks
uniqueunique offerings.
offerings.
Retail Multinational corporate
Simple, fully digital, personalized processes: Tech- and partner-enabled solutions across
eg, an account-opening process that takes under credit, financing, and payments that follow the
5 minutes without in-person meeting or video call customer and allow for personal advice
Small and medium-size enterprises Institutional
Personalized tech-enabled advice, products, and Comprehensive and tailored investment offerings
services: eg, automated invoice generation and with ESG¹ at their center, including advisory services,
submission for fast fund provisioning investment products, and regulatory-reporting
services
Merchants Private banking
Seamless, fully digital customer-checkout solution Personal tech-enabled advice (available 24/7 in
accepting all digital payment options any geography) with ESG at the center, and
technology, reporting, and tools as needed
1
Environmental, social, and governance.
German banking returns to the playing field 23Innovating under pressure: The media industry
As digital attackers and new technology disrupted traditional media, especially print and broadcasting, incumbents were forced to
adopt innovative business models and redefine customer value propositions. Publishers introduced digital newspapers, for example,
and broadcasters offered digital apps and video on demand to compete with streaming platforms, such as Netflix and Amazon Prime,
that directly reached into people’s homes.
Successful transitions were built on big data and artificial intelligence (AI), which help providers offer personalized experiences,
such as optimized content and targeted recommendations, to keep users engaged. More than 30 percent of German households
now use fee-based streaming services41 and 61 percent of Germans aged 14 to 29 now prefer watching TV on the internet instead of
traditional television.42
Takeaways: Banks could redefine their customer value propositions with new digital offerings and harness big data and AI to
provide greater customer satisfaction, broaden the service base, and increase pricing power and revenues.
around the world, as well as organizations facing and limit risks from changing customer demands
similar challenges in other industries. The most and uncertain outlook for existing assets. According
innovative banking leaders already offer first- to a 2021 study by the European Banking Authority
rate apps, modern payment methods, and readily (EBA) highlighting European banks’ exposure to ESG,
available SME loans; create bespoke investment more than half of exposures to non-SME corporates
projects; and tap existing capital markets and (58 percent of the total) are in sectors that might be
emerging funding forms, such as platform funding, sensitive to transition risk (that is, the risk that a net-zero
family offices, pension funds, and so on. emission scenario could pose to their existing business
model). Another EBA analysis shows that 35 percent
of banks’ total submitted exposures are towards EU
The ESG challenge
obligors with above-average (median) greenhouse gas
The growing relevance of ESG, and climate change
(GHG) emissions.43
in particular, for constituents across the spectrum of
European consumers, businesses, broader society, and The business world is taking notice: in a 2020
government, makes it imperative that banks engage survey, 42 percent of institutional respondents said
seriously and proactively with these pressing issues. they had incorporated ESG into their investment
decision-making process.44 In light of a recent
A strong level of engagement with ESG issues will be
announcement by the German government that will
needed from banks to help finance the economy’s
require solar installation on all new buildings and for
efforts to transition towards net-zero emissions,
major renovations,45 it is possible that even products
fulfill regulatory demands (for example, possible
like retail mortgages will use ESG/energy-efficient
requirements to systematically assess ESG exposures),
covenants much more broadly. ESG concerns also
24 German banking returns to the playing fieldlead to new investment needs: achieving climate using the bank’s influence as a lender and investor—
neutrality would require redirecting roughly a for instance, by supporting the development
quarter of current investments—compared with of subsided housing (Sozialer Wohnungsbau).
Germany’s long-term average of 20 percent—and Several NGOs are proposing more than two million
increasing capital outlay by 1 percent of GDP (or €40 additional units by 2030.48
billion new and €200 billion existing stock46).
— Contribute more meaningfully and strategically to
We estimate that by 2030, 25 to 40 percent of banking economic development—for example, by offering
revenues in Germany will be affected by ESG, whether services such as financing a more digital economy
through regulation or pressure from stakeholders at in line with the €750 billion EU recovery plan.49
large: for example, the ECB published a broad guide
— Serve society better—for instance, by
on climate-related and environmental risks for banks
addressing the growing pensions gap, helping
covering reporting, self-assessment, and banking
consumers save for retirement, and supporting
business models.47 In terms of impact on banking
measures such as equal pay and management
sectors, wealth and asset management is likely to
representation by women and minorities.
be most affected, followed by corporate, retail, and
investment banking, with payments least affected. — Help accelerate the development of digital
infrastructure in Germany and Europe, with
Of course, the term “ESG” covers a broader range of
support for projects such as digital identity
issues, all of which require the commitment of leading
verification and anti-money-laundering
banks, over and beyond climate change and Germany’s
assessments.
commitment to achieve net-zero by 2045, all of which
require engagement from banking leaders. Just a — Meet the needs of employees and new talent
sample of potential contributions would include the with more attractive careers and social
following: status, job security, personal and professional
development, and a healthy work-life balance.
— Promote the social and governance elements of
ESG frameworks by setting a good example and
Customer centricity, end-to-end process
digitization, and ESG stand out as the top
three agenda items for decision makers in
German banking.
German banking returns to the playing field 25As banks realign to meet rising and more diverse Germany’s telecommunications industry provides
stakeholder needs, they will face steadily increasing an example of what this can involve (see sidebar
competition. Fintechs and nonbank attackers are “Successfully developing the core business in
targeting attractive fee businesses as ecosystems telecommunications”).
proliferate and industry borders vanish. Banks
In discussions with us, German banking leaders cited
therefore must assert themselves to get their fair
many topics of great importance to them such as cost
share of revenues and profits.
reduction, IT, new revenue sources, and people and
Set top priorities culture. Three improvement priorities clearly stand out:
To achieve revenue and cost aspirations and address customer centricity, end-to-end process digitization,
stakeholders’ needs, banks must first clarify their and ESG.
priorities and address their biggest shortcomings.
Successfully developing the core business in telecommunications
In telecommunications as in banking, customers demand ever-faster, better, cheaper products, rewarding providers that
discard diverse and opaque offerings in favor of more intuitive, easy-to-understand product bundles, supported by better
digital journeys. Until 2010, telco providers thought they could cover (and monetize) the entire digital service sphere, but they
eventually realized they could not compete against true tech players such as Amazon or Google in many digital services. With
shifts in the value chain, regulation, competition, and rising pricing pressures, incumbents began to extend offerings more
closely related to their core products and existing footprints, seeing themselves as enablers of ecosystem players rather
than building entire ecosystems themselves. They understood the value of their key assets—local infrastructure—in meeting
customers’ demands for data.
To be sure, maintaining and upgrading the telecommunications network, especially the transition from 2G to 3G and now to 4G and 5G,
is costly and requires enough scale to justify such investments. As a result, the telco industry in Germany has gradually consolidated
into three major players, the “Big Three,” which now cover most of the market and in 2019 had a fixed and mobile market share of 85
percent.50
Takeaways: The German banking sector, by focusing on its core strengths and building on the trust it has earned from customers,
can achieve enough scale to afford the investments required to defend its position against new players.
26 German banking returns to the playing fieldThe next game is always the hardest.
Sepp Herberger, coach of the 1954 world champion German soccer team
We have just decided not to disband the
club even though we drew.
Jürgen Klopp, football player, coach, and Champions League Winner 2019
The toughest opponent is usually oneself.
Joachim Löw, coach of the 2014 world champion German soccer team
It is impossible to plant small trees and
expect to harvest 100 kilos of fruit in the
next year.
Pál Dárdai, Hungarian football player and coach
German banking returns to the playing field 2728 German banking returns to the playing field
3. A winning game
plan for 2030
It is impossible to plant small trees and expect to harvest 100 kilos of fruit
in the next year.
Pál Dárdai, Hungarian football player and coach
The targets set out above for banks—whether points of average assets by 2030. Based on the
monetary, related to employees, or to ESG—are mitigation scenario from chapter 2, banks’ operating
ambitious, and to achieve them, banks will need to income will likely increase from €22 billion to €27
grow in a sustainable way through profits: that is, via billion in 2030, leaving a gap of €30 billion to €40
an after-tax ROE of 7 to 8 percent or 70 to 80 basis billion51 (Exhibit 10).
Exhibit 10
To
To reach the
reach the ROEROE target
target of 7 of
to 87percent
to 8 percent
by 2030,by 2030,
banks banks
need need
to uplift to uplift
operating profit
operating profit by €30 to
by €30 billion to €40 billion. €40 billion.
Operating profit scenarios for the German banking market ... After-tax ROE,1 %
€ billion
57–67
Profit uplift from
mitigation
scenario of
€30–40 billion
27
22
2019 2030 2030
Mitigation Ambition
scenario3 scenario
32 3–4 7–8
1
ROE calculated based on profit after tax and before transfers to the fund for general banking risks as a percentage of the average equity (includes the fund for
general banking risks, but excludes participation rights capital).
2Excludes other and extraordinary result, otherwise the after-tax ROE would be –0.4% in 2019.
3Assumes slight improvement of historic growth rates with an annual revenue growth of ~0.50%, annual cost growth of ~0.25%, constant
risk costs, and annual average equity growth of ~0.25%.
Source: Deutsche Bundesbank, McKinsey analysis
German banking returns to the playing field 29These targets are achievable—with significant Craft a more responsive business
changes on the revenue and cost sides and renewed strategy
momentum in the competition with both new and
As change accelerates in the competitive landscape,
foreign players. Indeed, we urge banks to look
around customer requirements, and in technology,
beyond the traditional borders of their industry, think
standing still is not an option. Banks need to update
more broadly, and act more boldly. There’s no time to
their business strategies: the reopening of the
waste: a growing number of nonbank companies are
economy post-COVID-19 could be the right moment
already offering financial services, from accounts to
for reflection. To clarify their individual goals, and their
payments to lending, and powerful new competitors
specific advantages and challenges, banks may find
are sure to emerge, loaded with talent and capital
it helpful to ask a number of questions across five
while at the same time being unburdened by
themes:
outdated technologies.
— Customer proposition. What is our starting
As we have seen, customers are voting with their feet.
position in the customer franchise, and what are
Foreign banks have captured about 30 percent of
our competitive advantages from a customer
German corporate banking; as of May 2021, there are
perspective? Is our payment strategy fit for
five German fintech unicorns;52 neobanks already
today, for example, and can we thrive in a more
have millions of retail customers in Germany, while
instant, tokenized, and account-to-account-
ecosystem players are looming on the horizon. A
based future? Can our corporate offerings
recent study found that 61 percent of Germans
withstand foreign and purely digital players?
would be willing to use certain e-commerce players
Is our retail offering truly seamless across the
for financial services,53 while another study found that
different channels?
15 percent of small business customers are unhappy
with their Hausbank.54 — Scale. What is the scale and ambition of our
customer franchise by sector? Is our investment
Considering all the developments under way in the
banking globally competitive or supported by a
sector, it’s clear that industry leaders must now
large corporate customer base? Are the deposit-
decide whether they will redefine banking or let
generating activities of a retail bank used by
someone else redefine it for them.
mortgages and corporate customers at the
Changing the way any game is played is same bank, or should they be deployed toward
exceptionally challenging. No single solution will partners? Are we considering consolidation
suit every institution or situation. But considering enough?
successes and failures in other industries and
— Cohesiveness. Are the aspirations of our customer
countries, we believe that efforts on multiple
franchises interlocking? Do asset-management
fronts will be required: (1) crafting more responsive
offerings support investment services in retail
business strategies that look beyond the obvious,
banking and vice versa? Do payments and
(2) enhancing tech-enabled customer engagement,
investment banking support a corporate franchise,
(3) building new businesses, (4) implementing truly
or do they siphon off resources?
digital business models, and (5) redefining banking’s
purpose (including embracing ESG) to regain — Responsiveness. Are our decision and
relevance and prestige. governance processes aligned with customer
preferences? Can we react quickly enough
These five improvement themes should be
to changing customer preferences in retail
considered over and above existing efforts, which
banking? What is our reaction to digital
will merely yield a steady-state mitigation scenario
(crypto) assets in asset management and
overall (with likely additional market-share loses for
investment banking, open banking in retail
German banks).
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